steve.jarvis's picture

How has recent FX volatility affected underlying Currency trends?

Over recent weeks there has been a notable pick-up in volatility for a number of major Currencies, including reversals for the US Dollar &  Euro following their prolonged advance & decline.  The question is, has corrective weakness for the US Dollar & corrective strength for the Euro yet run its course, or will there will further retraces of the previous multi-month US Dollar advance & Euro fall?  And what now for the multi-month outlook?

Each week I assess the trend for every combination of G10 currencies pairings, quote both ways, a total of 90 charts.  Following this, I rank each of the Currencies from 1 to 10 and broadly categorize each as either bullish, neutral or bearish.   What has become clear over the past couple of weeks is that there have been a number of short-term trend reversals, but at the current time, the major underlying trends have changed very little.  I still have the US Dollar at number 1 and the Euro at number 10. 

The problem for EUR/USD (for example) is that for many months there has seems to have been an almost continual flow of good news out of the US whereas the Eurozone has been beset by one set of negative news after another.  This has resulted in EUR/USD being pulled lower and lower, to a succession of long-term lows, with only minor and short-lived corrections.  Finally over the past week or two there has been a reversal, and given the speed / extent of the previous multi-month decline, it is only natural that this should result in bouts of profit-taking when certain levels have been breached.  However, the underlying fundamentals would appear to have not changed and as a result many market commentators are still US Dollar bulls and Euro bears.  This stance ties in with my currency rankings, which strip out short-term volatility and focus on the underlying trends. 

Over the next few weeks the recent increase in volatility may persist with many currency pairings continuing to lack clear direction. The FX market may continue to focus on data releases for day to day direction, and while EUR/USD (for example) may remain choppy, it may well extend the recent recovery phase by another cent or two, heading back into the former (January-February) 1.1102-1.1530 range.  Patience may be the order of the day and making money may initially prove to be more difficult than it has been for a while. This is all normal market behaviour.  The primary trend is eventually expected to resume, or we will start to pick up signals that indicate the outlook may be changing.